The Civil Liability Act received Royal Assent on 20 December 2018. The review will commence by 20 March 2019 and be completed no later than 7 August 2019. Since this is the first review the Lord Chancellor only has to consult the Government Actuary although he/she will have to consult a panel of experts on any subsequent review.
In February 2017 the Lord Chancellor changed the discount rate from 2.5% to -0.75% although she also announced a period of consultation to review whether the current legal framework setting the rate is fit for purpose or whether changes are necessary.
The Discount Rate was set with reference to returns on index-linked gilts (or ILGS) on the grounds that this type of investment represents virtually “risk free” investment, specifically designed to keep in place with inflation. However, as the Government Actuary’s Department noted in July 2017 “risk free” portfolio is likely to be only a theoretical construct and even a portfolio invested in 100% ILGS would not lead to “risk free” Claimant outcomes. The rate is currently set on the basis that Claimants have an almost zero tolerance for risk of their investment. In fact, recipients often invest in a range of securities which have some risk attached and which derive greater returns on the investment. In reality Claimants do not behave as very low risk investors; they invest in diversified low risk portfolios and on average achieve higher returns than is assumed under the present law. This results in inflated payments for claims which overly penalise Defendants.
The Discount Rate in the UK is one of the lowest in the world. In Germany, it is 4%; in France it is 1.2% and in Ireland it is 1%. As Lord Keene pointed out in the debates relating to the Bill, the current rate consistently compensates for injury at more than 100% required by law. Awards currently average 120-125% even after management costs and tax. This is putting huge pressure on the National Health Service in claims for clinical negligence.
Under the Civil Liability Act the determination of the rate must now be based upon a rate of return that, in the opinion of the Lord Chancellor, a recipient of relevant damages could reasonably be expected to achieve based upon:
- More risk than a very low level of risk, but;
- Less risk than would ordinarily be accepted by a prudent and properly advised individual investor who has different financial aims.
There is provision for the Discount Rate to be reviewed every five years following consultation with a panel of experts. It is clearly envisaged that the Discount Rate must be set by reference to the prevailing economic conditions including inflation and tax.
Unfortunately Claimants, practitioners, Insurers and the NHSLA are still in the dark about what the actual Discount Rate will be. The Government has issued a further call for evidence which seeks up to date data and information as to how Claimants invest their damages, investment advice provided to Claimants and model investment portfolios. The deadline for the response to the call for evidence is 30 January 2019. In September 2017 the Justice Secretary David Liddington stated:
“While it is difficult to provide an estimate, based on currently available information if the new system were to be applied today the rate might be in the region of 0% to 1%.”
The Discount Rate is also under reform north of the border and in the Channel Islands.
There is pending legislation in Scotland to set the Discount Rate by reference to a notional investment portfolio being suitable for a hypothetical investor. The rate will be set by the Government actuary or the Deputy. This legislation is expected to come into effect in 2019. It has been suggested the Discount Rate in Scotland will be 0%.
In Jersey draft proposals have been published with a view to change the discount rate and is expected to come into effect in 2019. Dual Discount Rates are proposed where the rate will be 0.5% for a period of 20 years or less or 1.8% where the award covers a period of more than 20 years.
The draft legislation in Jersey is interesting because the rate of 0.5% has been set having regard to the inflationary difference between Jersey and the UK which is currently 0.5%. On that basis, if the Lord Chancellor and Government actuary work from the same assumptions we could be looking at a rate of 1%.
The question arises how practitioners and Courts will resolve the discount issue in Joint Settlement Meetings/mediations or trials over the next 140 days. One approach might be for the parties to settle on the basis of the current Discount Rate with an agreement to review if the Lord Chancellor changes the rate. Alternatively Defendants may seek to stay/adjourn claims pending the completion of the review.
If you would like to know more about this matter, please speak to your contacts at Plexus Law:
Anthony Baker, Partner
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Philip D’Netto, Partner
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Daniel Clegg, Partner
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